Early Distributions From Retirement Plans
An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a "taxing" experience. Fortunately, there are exceptions to early distributions.
Any payment that you receive from your IRA or qualified retirement plan before you reach age 59½ is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59½ rule that you should investigate if you make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.
In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to "elective deferrals" that you contributed from your pay, your employer's contribution and any income earned on all contributions to the account. If you made any nondeductible contributions, their portion of the distribution is not taxed, since you've already paid tax on this amount.
There is a way to avoid paying any tax on early distributions, however. It is called a "rollover." Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to an eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days of when you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.
If the early distribution from an employer's plan is paid directly to you, your plan administrator will normally withhold income tax at a 20 percent rate. If you roll over the distribution to a new plan, you must replace that 20 percent of the funds that were withheld and deposit that amount in the new plan or you will owe taxes on that amount. To avoid the inconvenience of this withholding, you can have your old plan's administrator transfer the rollover amount directly to the new plan or a traditional IRA.
All early distributions must be reported to the IRS. You will report tax-free rollovers on lines 15a and 16a of Form 1040 along with any taxable distributions, but you will enter on line 15b or 16b only the taxable amounts you don't roll over.
Early distributions from retirement plans can involve complex tax issues. Make sure you understand the issues or get competent tax advice.
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.
Site Offers Retirement Information and Strategies for Older Boomers, Seniors and Retirees
The best destination for older boomers, seniors and retirees has been updated to offer information on finding a job and funding retirement.
Senior Summer School featured on Living Live!
William Levy, Presdient of Senior Summer School, Inc. is interviewed on Living Live! with Florence Henderson.
What You Need to Know About Senior Citizens Travel
Are you drained of sitting at home, doing babysitting of your grandchildren? Have your dreams to explore the world not turned to reality? Are your eyes longing to capture the grandeur of the world around you? If yes, don't detain yourself from discovering the world. Your age should not be an impediment in living your life to the fullest.
Senior Citizens Find a Helping Hand
It has never been easier to pair caregivers and healthcare providers with senior citizens. The new website www.callseniorcare.com offers easy way for providers to be matched with individuals requiring assistance with everyday living. This innovative new services allows you to pick and choose the proper caregiver for any situation.